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Transfer Pricing Alert

Transfer Pricing Amendment Regulations, 2018 are
Following the finalisation of a consultative Low Value Adding Services
process towards the end of 2017, The Minister of
Finance has now officially updated the Transfer The Regulations also provide specific guidance
Pricing legislation in Zambia through the on the TP treatment of “low value added
issuance of the Income Tax (Transfer Pricing) services”. Where an intercompany service is
(Amendment) Regulations, 2018. deemed to be low value adding, the acceptable
mark-up that can be charged cannot exceed
The amended Transfer Pricing (TP) Regulations 5%.
provide new detailed guidance to taxpayers with
respect to how the arm’s length principle will be Low value adding services are characterised as
determined. follows:

The issuance of the amended TP Regulations has - They are not provided by any member
kept the momentum going in respect of the rapid of the group to unrelated customers;
progression in TP compliance in Zambia. This - They do not create valuable intangible
follows the issuance of the draft TP Regulations property; and
in 2017 (which have now been enacted) and - They do not involve the assumption,
Cabinet’s announcement in 2017 to sign up to control or creation of significant risks.
the Organisation for Economic Development and
Co-orporation (OECD) Base Erosion and Profit Exceptions
Shifting (BEPS) Inclusive Framework.
All enterprises are affected by the Regulations
with the exception of local enterprises that are
Why not part of a Multinational Enterprise (“MNE”)
group and have an annual turnover of less
For detailed information than K20 million (approximately USD2
please contact:
TP compliance is now a key consideration of tax
authorities the world over. The concern is million).
Jyoti Mistry whether the transfer pricing policies adopted by
Jyoti.mistry@pwc.com multinational companies reflect the underlying An MNE is defined in the Regulations as “…a
Tel: +260 211 334000 value and substance of transactions and business entity that is part of a multinational
Cell: +260 77740641 activities undertaken by local entities. enterprise group”.

Lydia Pwadura Taxpayers now need to ensure that all related An MNE group is defined as “…a group of
Lydia.g.pwadura@pwc.com party transactions are supported by local TP associated business entities established in two
Tel: +260 211 334000 documentation. This should properly reflect the or more countries”.
Cell: +260 963874779 risks assumed, capital and skills employed.
Proving arm’s length
George Chitwa They should also be able to demonstrate that the
George.chitwa@pwc.com actual consideration and terms and conditions The amended TP regulations provide detailed
Tel: +260 211 334000 negotiated are aligned to the substance and value guidance on how taxpayers can prove that
Cell: +260 971027555 of the underlying transactions and activities. their related party or controlled transactions
are at arm’s length and therefore acceptable to
George Chitwa
Detailed Guidelines the Zambia Revenue Authority (ZRA).
Tel: +260 211 334000
What transactions are affected? The key consideration will be whether such
Cell: +260 971027555
transactions are comparable to uncontrolled
George Chitwa - Local and cross-border intercompany transactions (i.e. transactions on the open
George.chitwa@pwc.com transactions of business enterprises in market between independent parties).
Tel: +260 211 334000 Zambia; and
Cell: +260 971027555 As per global best practice in Transfer Pricing,
- Specific transactions between related parties the Regulations provide detailed steps to
e.g. management services, financing ascertain whether a company’s intercompany
arrangements, transactions of both tangible transactions are at arm’s length.
and intangible items (e.g. royalties, etc.) This includes guidance on carrying out
functional analyses checks and the selection of
the appropriate TP methods to test the
intercompany transactions.
The 5 TP methods that may be used are as How this affects you
In order to comply with the TP Regulations,
1. Comparable uncontrolled price method; any person engaging in controlled transactions
2. Resale Price Method; will be required to have contemporaneous
3. Cost Plus Method; documentation to verify that all related party
4. Transactional Net Margin Method; or transactions are consistent with the arm’s
5. Transactional Profit Split Method. length principle.

A taxpayer may only use one TP Method to The meaning of the term contemporaneous in
determine whether a given controlled this instance, is that the TP documentation
transaction is at arm’s length. that a company has in support of its related
party transactions must at all times be
The Regulations provide that a TP Method other reflective of the current dynamics of the
than the 5 listed, may be used in the following company and the controlled transactions. The
circumstances: Regulations provide that this should be
reviewed on an annual basis.
- Where none of the 5 methods can be Given that the prescribed documentation is
reasonably applied to determine the arm’s required within 30 days from the date of
length conditions; and
request by ZRA, this practically means that
- Where such other method indicates a result
that would be achieved by independent affected companies must have the prescribed
parties engaging in a comparable documentation readily at hand.
uncontrolled transaction under comparable
circumstances. Our assistance
Taxpayers will need to apply to the In view of the above, we would recommend
Commissioner-General to be able to use a that you review your TP position and ascertain
method other than the prescribed 5. Approval which level you may need our assistance.
will be at the Commissioner-General’s
discretion. Our experienced local TP team, together with
the support of specialist TP staff in our global
centres of excellence, provide tailored and
Documentation requirements
business oriented TP solutions, including the
- Preparation, on an annual basis, of TP following:
documentation in line with local TP
Regulations and OECD TP Guidelines and - Preparation of local TP documentation
the UN TP Manual in support of in line with local requirements and
intercompany transactions; and global best practice (OECD);
- Maintenance of specific TP information in - Review and localisation of global
respect of the intercompany transactions company TP policies to ensure that
entered into by a company. these fit within the parameters of local
TP provisions and global best practice;
The TP documentation should be prepared by - Assisting in liaising with ZRA in the
the annual Income Tax return filling deadline
event of TP audits, including
(i.e. 21 June) but is not to be filed.
objections to assessments;
TP documentation/information should be - Reviewing specific transactions
provided upon request by ZRA within 30 days. (including the provision of
intercompany management services)
Penalties and developing supporting systems to
support arm’s length results;
Failure to provide TP documentation will be an - Assisting with developing/reviewing
offence under the Income Tax Act 1966, as TP policies, etc.
amended (ITA), with defaulters liable to various
penalties. We look forward to hearing from you. We shall
keep you updated of any developments.

This publication has been prepared as general information on matters of interest only, and does not constitute
professional advice. You should not act upon the information contained in this publication without obtaining specific
professional advice.

© 2018 PricewaterhouseCoopers Limited. All rights reserved. In this document, “PwC” refers to
PricewaterhouseCoopers Limited which is a member firm of PricewaterhouseCoopers International Limited, each
member firm of which is a separate legal entity.